A whirlwind of votes, a black hole of dollars

In the first four months of this year, Brazil reported a record number of foreign visitors: 4.4 million people. Half of them were Argentine. In that same period, imports went up 35.7 percent year on year. Meanwhile, the trade surplus shrank to US$1.2 billion from US$6.2 billion last year.

Inflation reduction is welcomed across the board by voters, but middle- and upper-class Argentines are starting to have a blast. If you earn a salary in pesos, you can now freely purchase US dollars through home banking, thanks to the government’s decision to lift most of the currency restrictions. With those dollars, you can make your dream trip abroad or purchase goods through Amazon, now delivered right to your door and almost free of taxes. Many will soon begin to plan their trip to the World Cup in the United States, Canada, and Mexico next year, hoping that Lionel Messi will deliver his last dance.

It should not be surprising, then, that President Milei’s candidate, Manuel Adorni, won the elections in Buenos Aires City last week, nor that he particularly walked away with the most affluent sectors of town. The defeated centre-right opposition, former president Mauricio Macri’s PRO party, does not oppose Milei’s economic programme – on the contrary, the party’s candidate, Silvia Lospennato, was one of the most vocal supporters of the government’s economic policies last year from her seat in the lower house Chamber of Deputies. Between the two of them cumulatively – an alliance that is likely to happen when Buenos Aires Province votes on September 7 – they got 45 percent of votes.

What is Milei asking for in return? Simple: US dollars back. Milei and Economy Minister Luis Caputo are not the first – and likely will not be the last – Argentine leaders who believe their governing lives would be much easier if Argentines decided to bring the roughly US$250 billion they have, figuratively, “under their mattresses.” 

If it were that simple, it would have happened before. But the administration says it is different this time: without a fiscal deficit, the government will not print pesos; with fewer pesos, Argentines who want to consume will have to use the stashed dollars. Those dollars, in turn, will strengthen Central Bank reserves.

Easier said than done. Argentines know their history, and they have enjoyed spending sprees in the past at the cost of the Central Bank, which invariably ended in economic catastrophe: in the late 1970s, in the 1990s, in the mid- and late 2000s. Milei will have to work hard to convince them that things will not be as they were.

Nobody can deny that the President seems ready to continue to be disruptive, even as he consolidates power, as he probably will in this year’s midterm elections. His chainsaw on spending still has fuel. After three consecutive months of increases, primary government spending in April again went down, 1.2 percent year-on-year. This puts the administration in a solid position to meet – and probably exceed – the fiscal target in the agreement signed last month with the International Monetary Fund (IMF). 

The lion’s share of the government’s budget cuts this month were in energy subsidies: minus 78 percent in real terms versus last year. Even with that, the government announced this week it will eliminate remaining energy subsidies for people who live in the upscale neighbourhood of Puerto Madero and in luxurious “country” gated communities in the suburbs of the capital. Surely, nearly every person living in those areas must have voted for Milei in 2023.

Whether the “mattress dollars” plan deliver results or not, it is a good sign that the government understands where the weak point of its economic programme is. Since they decided to overvalue the peso as one key anchor for their anti-inflation policy, Milei and Caputo have been building bridges of US dollars to try to cover for the hard cash flying away: first by delaying import payments, then by the “blanqueo” tax pardon, now with the US$20-billion deal with the IMF. Will it ever be enough? 

Going forward, Caputo hinted this week that seeking debt from voluntary international markets could be around the corner: “in the short term” and “hopefully this year,” to be specific. This means that the government will resort to more debt to meet the demanding reserves accumulation target set by the IMF agreement – it is currently some US$6 billion behind, and the first review is in mid-June.

It is not new for Argentina that a whirlwind of votes requires a black hole of US dollars. The problem? Black holes are hard – if not impossible – to fill.